China's enforcement of standards is as narrowly balanced as a mountaineer on a knife-edged ridge. Without standards that favor its fledgling industries, the country may fall back into the low-tech, low-margin abyss from which it has struggled to ascend. But if it favors Chinese companies too much, it may fall into the other abyss: market failure. Standards, after all, exist to create world markets. They aim to increase the number of potential customers by encouraging manufacturers to form alliances, develop technology, and reduce per-unit production costs.

ILLUSTRATION: ERIC BOWMAN

If the Chinese government and domestic players don't reach a consensus on standards with international companies, they could be left out of international markets entirely. Then Chinese consumers would not be able to enjoy the benefits of advanced technology and reduced prices. To avoid falling into this situation, the Chinese government jettisoned support for WAPI in favor of continued amicable relations with the United States, its largest trade partner.

Government and industry in China also write standards to foster the development of homegrown technologies that won't rely on foreign intellectual property. China feels it must ensure that the nation's economy and security cannot be disrupted by non-Chinese governments or businesses. For example, in the mid-1990s Cisco Systems Inc., in San Jose, Calif., supplied 80 percent of all high-speed Internet routers, leaving the Net vulnerable to actions by Cisco or cyberattacks against its technologies. Since then, the government has encouraged Chinese telecommunications carriers to broaden their range of suppliers. As a result, many important government contracts went to Huawei Technologies Co., a Chinese vendor, and key deals were made with others, such as Juniper Networks and Alcatel. By 2006, Cisco will be just one of four high-end-router suppliers.

The government's goals, however, generally have less to do with national security and more to do with commerce: the primary intent is to make money in the long run. Toward that end, the government has long adopted a policy of inducing foreign investment in Chinese technology. For example, China's patient shepherding of TD-SCDMA, its third-generation cellphone standard, has led a number of foreign telcos, including Nokia Corp., in Espoo, Finland, and Siemens AG, in Munich, Germany, to enter into strategic alliances and joint ventures with Chinese manufacturers for developing this standard and manufacturing compatible handsets.

Since the 1980s, the Chinese government has used both carrots and sticks, and not all involve standards. A beneficial tax policy for software developers, like ones adopted in Beijing and Shanghai, is an example of a carrot, while regulation—such as the WAPI requirement—can be a strong stick with which to beat off competition from non-Chinese technologies.

We've found that there are four commonly held points of view—by people both inside and outside China—regarding China's push for high-profile technical standards. Each of them is only half true.

Chinese officials have defended the country's AVS initiative by arguing that licensing fees for DVD core technologies—which can run up to $20 for each unit sold—are unreasonable in global markets, where buyers demand prices as low as $39 per player. A similar cost-cutting measure is the development of the TD-SCDMA standard for cellphones.

When China joined the WTO, it agreed that domestic companies would pay royalties for technologies protected by patents, that it would apply equal treatment to domestic and international players, and that its domestic standards authorities would operate openly. Consistent with those promises, though, China can still underwrite technologies that don't infringe on foreign patents.